Cisco expected to show stability, strength

Sales, earnings expected to rise despite wobbly IT market

By

BenjaminPimentel

SAN FRANCISCO (MarketWatch) -- Cisco Systems is expected to report gains in both sales and earnings for its second fiscal quarter on Wednesday, with analysts looking for signs of strength and stability from the tech giant despite uncertainties in the IT market.

Analysts expect Cisco to post earnings of 43 cents a share, on revenue of $11.2 billion, according to a consensus survey by FactSet Research. For the year-earlier period, the San Jose, Calif.-based company reported earnings of 37 cents a share, on revenue of $10.4 billion.

Pessimism from last December has eased a bit, but spending in the telecommunications industry remains wobbly, and there are lingering worries about the financial crisis in Europe.

But Cisco’s is seen cashing in on steady demand for networking gear and data center systems in general as companies shift to new technologies based on cloud computing. Cloud computing enables businesses to access computing power through a network instead of building and maintaining in-house data centers.

Baird analyst Jayson Noland said in a note that the “demand environment is spotty.”

But Noland also wrote, “We believe Cisco stands to benefit from solid conditions at enterprise/commercial accounts and positive long-term themes in service provider, which will likely be somewhat offset by challenging conditions in public spending and an increasingly competitive marketplace in core businesses.”

Cisco’s rivalry with Hewlett-Packard
HPQ, -1.03%
will likely also come into sharp focus. Once partners, the two companies have been slugging it out in the IT market, with Cisco pushing into the blade server market, and H-P becoming more aggressive in networking.

Noland said Cisco may be gaining the upper hand, saying, “Cisco continues to win ... while H-P networking has lost momentum over recent quarters.”

Meanwhile, there’s some optimism that fears of grim IT spending may be overstated. ISI Group’s Brian Marshall wrote that this year’s “budget for communications equipment could shape up better than many fear.”

He cited remarks by Cisco Chief John Chambers who “indicated many enterprises are planning for flat to slightly down budgets, but may not cut as much as he had expected.”

Cisco’s more aggressive posture toward rivals such as Juniper Networks
JNPR, -1.30%
also appears to be paying off.

Sterne Agee analyst Shaw Wu wrote that while “some players like Juniper have missed expectations, our channel and customer feedback indicate that part of the reason is likely because Cisco continues to operate with more confidence and aggressiveness, making it tougher for competitors.”

Still, global economic uncertainties have prompted some analysts to take a more cautious stance.

“Checks were conflicting and ambiguous leading us to consider the report a building block in our investment thesis and not an inflection,” Morgan Keegan analyst Simon Leopold wrote.

“As a large equipment supplier, Cisco is somewhat beholden to the macro environment, and this leaves us expecting an in line forecast,” he added.

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